Teva's stunning list of cuts targets 14K jobs, $3B in costs and plants around the globe

Teva’s layoffs and cost cuts are here—and they're far larger than reports predicted.

The company said Thursday it would slash its headcount by 14,000, eliminating more than 25% of its worldwide workforce. That's 4,000 more than the most dire scenario raised ahead of the announcement. It's aiming to cut $3 billion from its annual costs, $1 billion more than analysts had discussed.

And the ax will fall swiftly, with the majority of job cuts coming in 2018; most of the affected employees will receive notice over the next 90 days, Teva said. Meanwhile, manufacturing plants, R&D facilities and offices around the world will shut down or be sold.

The cost-cutting plan comes courtesy of new CEO Kåre Schultz, whom Teva recently tapped to help get things back on track. The company is burdened by debt at a time when it's facing competition to its lead drug Copaxone, struggling under industrywide generics price erosion, and suffering from a slowdown in Teva’s generics launch schedule.

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"Basically the only thing that we’re really protecting is the product flow," he said on a Thursday morning call with investors.

The embattled drugmaker expects to save $3 billion by the end of 2019. That’s a large chunk of cash, considering that it estimates its total cost base for this year will check in at $16.1 billion. Teva also expects to rack up a restructuring charge of $700 million, mainly related to severance costs, it said. 

And job cuts aren’t the only measure Schultz is taking to reduce costs. The company will also suspend its dividend and keep looking for opportunities to self off pieces of its business. Teva won't cast off actual pharma products, Schultz said on the call, but it'll look at jettisoning "all the sort of side things that are not directly linked into product sales," such as distribution.

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It’s scrapping its 2017 bonuses, too, “due to the fact that the company’s financial results are significantly below our original guidance for the year,” it said. Teva has lowered that guidance three times this year, twice by more than $1 billion.

The new restructuring blueprint will deal a big blow to generics, a business that’s struggling mightily. Teva plans to tweak prices and discontinue products, which will in turn speed up closures and selloffs of “a significant number” of manufacturing plants in the U.S., Europe, Israel and emerging markets. Hard times in the copycat drug business recently forced similar action from Novartis’ Sandoz, albeit on a much smaller scale.

Teva plans to shutter a laundry list of R&D facilities, headquarters locations and other offices around the world and review R&D programs across the company in both its generics and specialty portfolios. It plans to scrap some development projects immediately, it said. 

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Some higher-level workers will also get the boot; as part of the new, pared-down organizational structure Teva announced a couple of weeks back, the company will be “reducing layers of management,” it said.

"These are decisions I don't take lightly but they are necessary to secure Teva's future. We will implement these changes with fairness and the utmost respect for our colleagues worldwide,” he said in a Thursday statement, adding that “today's announcement is about positioning Teva for a sustainable future."

Schultz has plenty of experience with cost-cutting, which made him an attractive fit for the Teva job. In his previous post as Lundbeck's chief executive, he rolled out a restructuring that claimed 1,000 jobs—and within a year of his arrival, he had profits exceeding expectations and revenue climbing. And while the Teva effort is much, much larger, he's taking a similar approach.

"It’s very much following the same pattern, where you basically look at everything and try to optimize everything in one go," he said on the call. The process also involves making sure the cost-cutting plans are "highly executable" and "borne out of specific targets for specific units." 

And Credit Suisse analyst Vamil Divan, M.D., for one, figures that track record will sit well with investors.

RELATED: Teva moves to cut hundreds of manufacturing jobs in Israel

"We believe investors will also be willing to give him the benefit of the doubt that he will be able to successfully execute on this significant restructuring, although there is no clearly defined long-term strategy at this time to allow us to understand what the company will look like following this aggressive period of restructuring," he wrote to clients.

Of course, pushing mass layoffs through is no easy task in Israel, where workers' representatives were already mobilizing before Teva made the announcement. Avi Nissenkorn, chief of the Histadrut labor federation, declared a nationwide half-day strike for Sunday.

"The entire economy—from the airport to the banks to the seaports to the municipalities to the government service to the health clinics—will stand until noon on Sunday in solidarity with Teva's employees," Nissenkorn told reporters.

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Teva's been down this road before, but Schultz is undeterred. “Consultations with the relevant employee representatives will begin in the near term,” Teva said Thursday.

The cuts are deep, but Bernstein analyst Ronny Gal called executing cost cuts “critical” in a Wednesday note ahead of Teva's unveiling its detailed plans. "We will judge the company in part on its ability to persevere through the local opposition," he wrote.

Meanwhile, though, at least one analyst says the moves may be too broad. Wells Fargo's David Maris, who called the plan "unfortunate" in his own note to clients, noted that "it may also have significant negative effects to Teva’s competitiveness."

"We question how beneficial it may be to cut a quarter of Teva’s workforce, and whether this disruption will further weaken the business and financial controls," he said, adding that "Overpaying for Actavis generics, a Mexican generics company, underinvesting in a pipeline and other missteps are some of the factors that have resulted in the current crisis, in our opinion.”